Why Nigeria Just Did Major Damage To The Oil Market, And Why It Will Be Tough To Undo

Nigeria's controversial oil industry bill is expected to
eventually pass but the government may find it tough to later
shift gears as international oil firms targeted under the
legislation scale back their investments.

The Nigerian parliament is debating the Petroleum Industry Bill,
an attempt at oil-sector reform in which Abuja can negotiate
“downward” a foreign firm's share of profits and impose higher
royalties and taxes, said Peter Pham, director of the Africa
Project at the New York-based National Committee on American
Foreign Policy and an associate professor at James Madison
University in Harrisonburg, Virginia.

Despite potentially spending billions of dollars, a firm not seen
as “fully exploiting” an oil block may risk having it turned over
to a Nigerian upstart instead, Pham added.

While it is theoretically possible to alter the oil law in the
future, “as a matter of practical politics” it will be tough, he
argued. Even if the bill passes in the coming days, it will be at
least 18 months before a new parliament revisits the law,
“assuming it wants to,” he noted.

By that time, international oil companies will have been “scared
off,” as blocks are revoked and given to Nigerians “loath” to
surrender them, he said.

“In short, undoing damage would be difficult because there will
be new entrenched interests with a stake in the new status quo.”

Others are not so sure.

Backers of the hotly-debated bill will eventually see production
and investment fall, perhaps by $3 billion annually, which might
prompt them to “change the laws a bit and bring more people in,”
argued Sebastian Spio-Garbrah, a New York-based analyst covering
Africa at the Eurasia Group, a research and consulting firm.

At the moment, the country is “just not in the mood for being
reasonable” and wants to “own” the industry, which has been
dominated by names like Chevron and Total, Spio-Garbrah told
OilPrice.com. While local firms may lack the “technology of the
Exxons,” he noted, the “Pollyannish” government believes Nigerian
firms can perhaps later hire oil-services companies to help out.

The country's oil industry
needs to be deregulated because the Nigerian National
Petroleum Corp. is “clearly inefficient,” Pham said. But gaining
political support for restructuring the state monopoly has meant
adding other financial measures to the bill targeting
international petroleum giants that will jeopardize future
foreign investment, he cautioned.

The country was already hurting, as militant activity in the
Niger Delta forced production off shore. The government
instituted an amnesty program last year for fighters willing to
change their ways that brought some normality to the region.

President Umaru Yar'Adua’s illness, however, kept him out of the
country for months, a situation prompting Vice President Good
Luck Jonathan to become the interim leader. In part due to the
crisis created by this “political
vacuum,” the promised social development and funding under
the amnesty have not come about, Pham noted.

For now there is an “uneasy quiet in the Delta,” he added, and
oil companies are reluctant to return in case violence sparks
again.

Nigeria's share of global production, moreover, has been “off a
third” in the last half-decade alone, he said, adding that last
year about $8 billion was invested in Angola's deep-water
resources -- “more than twice as much” as in nearby Nigeria.

Now the oil leader in sub-Saharan Africa, Angola will have
achieved double its neighbor's production by 2020, he said,
quoting industry estimates.

Western oil companies are still interested in the country despite
the uproar over the petroleum bill. The Nigerian division of U.S.
energy company Chevron announced plans to invest $3 billion in
several gas projects in the country, according to media reports
last month. Reports also signaled that Total wants to invest $20
billion in oil and gas exploration.

Pham, however, would “really question whether Total would put $20
billion

into Nigeria.”

To a certain extent, operating in
Nigeria under the new law will mean the oil majors will
have to “grin and bear it,” he added. It’s likely they will adopt
a business model not as traditionally
“forward-thinking” as in the past and “try to extract what they
can while they can," he said. It's doubtful, he added, that firms
will pour money into exploration if their position in five or 10
years is uncertain.

Western oil money may seek out
a market like Angola, which can offer a “business model that's
fairly reliable,” Pham told OilPrice.com. China may then figure
more prominently in Nigeria, while local firms, many politically
connected, will step up, he said.

Vice President Jonathan has been the “real mover” on the bill in
recent months, and as a result, the bill's been “bogged down in
that ambiguity,” with no indication of what Yar’Adua may think,
he said.

“Yar'Adua could die tomorrow, Jonathan could be assassinated the
next day, and these reforms would come in some fashion,”
Spio-Garbrah of the Eurasia Group stressed. The bill will pass
because structural forces, irrespective of whether Jonathan
becomes president, are pushing for this change, he argued.

In the end, claiming a “bigger slice for the nation” will be
politically popular among the political class, which stands to
gain in the short term from revamping the oil sector, Pham said.
The “average Nigerian on
the street,” by comparison, will feel greater pain, as
fewer oil revenues trickle down in future years.